Fed nominee Janet Yellen objects to audit of monetary meetings

Federal Reserve Vice Chairman Janet Yellen, President Obama’s pick to head the central bank, took a strong stand Thursday against a Republican measure to rein in the Fed, even as she wooed and wowed senators at her confirmation hearing with her polite but firm responses to criticism of the central bank’s easy money policies.

Ms. Yellen said she strongly opposes legislation to audit the Fed if it allows Congress to scrutinize and pressure the central bank’s internal deliberations over interest rates and monetary policy. Sen. Rand Paul, Kentucky Republican, is pushing a bill that would give congressional watchdogs authority to audit such internal deliberations, and is demanding a vote on the bill as the price of allowing the Senate to vote on Ms. Yellen’s nomination to become the Fed’s next chairman in January.

“I would object to legislation that would subject the Fed to short-term pressures that would affect its independence,” she told the Senate Banking Committee. It was her first appearance before Congress since President Obama last month nominated her to replace current Chairman Ben S. Bernanke, who is scheduled to depart Jan. 30.

The two-hour hearing was highly cordial despite some tough questions from Republican lawmakers, and went so smoothly that it helped stoke new record highs for both the Dow Jones industrial average and Standard and Poor’s 500 index Thursday, while likely enhancing the 67-year-old economist’s already strong prospects of being confirmed by the Senate.

Ms. Yellen stressed that she is a strong advocate for openness and transparency at the central bank, which has already taken unprecedented steps under Mr. Bernanke such as scheduling regular news conferences and media interviews to make the Fed more accessible to the public.

“We’re one of the most transparent central banks in the world,” she said. “But I would not support anything that diminishes [the Fed‘s] independence. … For 50 years, Congress has recognized that there should be an exception to the [General Accountability Office’s] ability to audit” federal agencies when it comes to the Fed’s highly sensitive monetary deliberations, which are closely followed and regularly move financial markets all over the world, she said.

Longtime Fed-watchers said Ms. Yellen’s poised performance made the hearing a resounding success for the nominee to what some have called the second-most powerful office in the world.

“Yellen has a strong backbone,” said White & Case partner Ernie Patrikis, who is a former chief operating officer of the New York Reserve Bank. “Every time she was pressed to agree with a senator’s statement, she parried the challenge tactfully. She did not agree to anything just to placate an inquisitor” and managed to “avoid being pinned down” by either side.

With investors and businessmen trying to take the measure of the new Fed chief, “it was extremely important that Yellen did not come out of the hearing bruised,” he said.

Ms. Yellen stressed repeatedly that she sees the Fed’s priority as nurturing the fragile economic recovery with ultra-easy monetary policies and near-zero interest rates until the economy and labor market show enough vigor to keep recovering on their own.

“I consider it imperative that we do what we can to promote a very strong recovery,” she said. “We can’t have normal rates unless the economy is normal.”

Liberal Democrats on the committee generally praised Ms. Yellen, but complained that wealthy investors seem to be the main beneficiaries thus far of the Fed’s stimulative policies, which have sparked stellar gains in the stock market. Ms. Yellen stressed that the Fed’s goal has been to help ordinary Americans, and it has been doing so by helping to ignite a robust recovery in the housing market that is increasing the assets and well-being of the middle class as well as the rich.

Ms. Yellen was treated deferentially by committee Republicans, but nearly all of them questioned her closely on the Fed’s loose money policies. Many complained that the Fed’s program of purchasing $85 billion a month of U.S. Treasury bonds and mortgage-backed securities has the potential to stoke high inflation and financial bubbles, has yet to spark a strong recovery, and will be difficult for the central bank to end.

“I worry that we’re on a sugar high,” said Sen. Mike Crapo, Idaho Republican. “That’s dangerous for the little person out there who’s trying to pay his bills and put away a little for retirement.”

Several Republicans contended that Fed already has already created a bubble in the U.S. stock and bond markets — something which Ms. Yellen vehemently denied. The S&P 500 has surged by 25 percent so far this year, and is up by 163 percent since touching a 12-year low in March 2009.

“Stock prices have risen pretty robustly, but if you look at traditional measures” such as price-earnings ratios, which factor in record-high corporate profits, “you would not see stock prices in territory that suggests bubblelike conditions,” Ms. Yellen said.

Ms. Yellen said she would not hesitate to use the Fed’s regulatory and monetary powers to curb dangerous market bubbles in the future, if necessary, however, and she said the Fed also would remain vigilant against risky practices by banks which could lead to another financial crisis like the one that caused the Great Recession in 2008.

“This is the most important lesson learned from the financial crisis,” she said.